Staff Paper Report of the Lansing Financial Health Team by Eric Scorsone, Ph.D. Christina Plerhoples Traci Taylor Staff Paper 2013-1 March 18, 2013 Department of Agricultural, Food and Resource Economics MICHIGAN STATE UNIVERSITY East Lansing, Michigan 48824 MSU is an Affirmative Action/Equal Opportunity Employer 1 The authors would like to thank Ms. Nicolette Bateson and Ms. Angela Bennett for their time and assistance with this research project. 1 Table of Contents I. INTRODUCTION .................................................................................................................. 3 II. ECONOMIC AND DEMOGRAPHIC HISTORY ................................................................. 7 Demographics ............................................................................................................................. 7 City Government Response to Demographic Changes ............................................................. 12 Economy ................................................................................................................................... 13 III. CITY FINANCES .............................................................................................................. 16 General Fund ............................................................................................................................. 17 Special Revenue Funds ............................................................................................................. 27 Proprietary (Enterprise) Funds .................................................................................................. 30 Internal Service Funds .............................................................................................................. 34 IV. DEBT ................................................................................................................................. 35 V. PERSONNEL TRENDS AND COSTS ................................................................................ 36 Annual Earnings and Benefits .................................................................................................. 36 Pension Benefits........................................................................................................................ 39 Other Post-Employment Benefits ............................................................................................. 42 VI. COMMITTEE RECOMMENDATIONS .......................................................................... 45 Short Term Subcommittee ........................................................................................................ 45 Long Term Subcommittee ........................................................................................................ 51 Regional Subcommittee ............................................................................................................ 51 List of Exhibits .............................................................................................................................. 59 Endnotes ........................................................................................................................................ 61 2 I. INTRODUCTION City of Lansing Financial Health Team MISSION In an era of economic turmoil that has left some of Michigan’s largest cities on the brink of bankruptcy, the city of Lansing remains in a relatively strong financial position that will allow it to perform the essential functions of city government both in the short and long term. However, to keep the city on sound financial footing into the future and to preserve and enhance the community’s quality of life, Mayor Virg Bernero’s Financial Health Team will conduct a comprehensive review of the city’s financial health and make recommendations for strengthening the city’s financial position now and in the future. FINANCIAL HEALTH TEAM MEMBERS David Hollister, Chair Prima Civitas Foundation Mark Alley Emergent Biosolutions Jerry Ambrose City of Flint John Brown Jackson National Life James Butler MSHDA Paula Cunningham Capitol National Bank Scott Dedic United Auto Workers Region 1-C Robert Emerson McAlvey, Merchant and Associates Jim Herbert Neogen Corporation Chris Holman Greater Lansing Business Monthly Dr. Rev. Melvin T. Jones Union Missionary Baptist Church Sergio Keck Lansing School District Steven C. Liedel Dykema Law Firm Joe Ruth Sparrow Health System Heather Shawa-DeCook Demmer Corporation Ron Simon Auto-Owners Insurance Robert Swanson Michigan Civil Service Commission Lisa Webb-Sharpe Lansing Community College STAFF Angela Bennett Interim Finance Director, City of Lansing Renee Freeman Office of the Mayor, City of Lansing Randy Hannan Chief of Staff, City of Lansing Dr. Eric Scorsone Michigan State University 3 This staff paper reflects the deliberations of the Lansing Financial Health Team. This Team was appointed by Mayor Virg Bernero of the city of Lansing in the fall of 2012. The city of Lansing has experienced several years of ongoing budgetary challenges, having made reductions of over $60 million in its General Fund budget since 2006. Due to continued property value declines, the FY 2013-2014 budget process was shaping up to be another year of budgetary challenges. In this environment of ongoing fiscal stress experienced by the City and other municipalities, the mayor felt it was critical for a group of outside experts to provide him with a roadmap for changes and reforms to city operations, services and financial structure. The Team’s purpose then was to assess the city of Lansing’s financial conditions and propose reforms and changes that will ensure the short and long term solvency of the city government. In order to accomplish this purpose, the Team set up three subcommittees including short term solutions, long term solutions and regional solutions. Each group met and deliberated in order to bring forth proposed reforms. This staff paper reflects those deliberations and recommendations. The Team presents this plan as a route for city government to achieve short and long term solvency as well as strengthen the regional economy. City governments in Michigan have all been facing significant challenges throughout the last decade. These challenges include falling property values and associated tax revenues and falling state aid plus the rising cost of employee compensation, particularly health care costs. This combination of falling or stagnant revenues and higher costs has meant structural deficits for many communities including the city of Lansing. Tough choices have been made including pay cuts and layoffs, deferred capital projects and fewer city services. Now, even these solutions may not be enough and this report focuses its attention on even more broad-based and innovative solutions to the problem of municipal structural deficits in Michigan. All of these challenges exist within the context of a broken model of municipal finance. For many decades, the state of Michigan has imposed a system of municipal finance that relied heavily on property taxes and state revenue sharing of the state sales tax. Because of state revenue sharing, Michigan municipalities are limited in the types of revenues they receive, the theory being that revenue sharing obviates the need for revenue sources like local sales tax. This model worked relatively well during the heyday of the auto industry. However, a number of factors converged to begin to erode this. The major factors behind the erosion were the restraints put in place around the property tax system, including the Headlee Amendment to the Michigan Constitution and then later so-called Proposal A. Both of these put major restrictions on the growth of the property tax base and property tax revenues. A second and more recent factor has been the absolute decline in state revenue sharing. As the economy ground to a halt in the first decade of the 21st century, state revenue sharing was cut to address state budget deficits. These revenue forces were playing out in concert with declining population and high fixed costs for legacy infrastructure in major central cities. This combination has led to a broken system of municipal finance, which needs to 4 be addressed by state policy makers. New tools are needed for municipalities to function in the 21st century. A New Model For Government Given the financial challenges facing the city of Lansing, a new model is needed to describe how city government will function in the 21st century, given the existing and likely future resource constraints. This new model envisions a city workforce wrapped in the best technology that enables services to be delivered at a high level of efficiency and effectiveness. This new model is based on the likelihood that city governments will likely have a smaller workforce and continue to face financial pressures. The existing city government model presupposes a specialized and labor-intensive service delivery system. Each service delivery area requires trained specialists in their field, such as building inspectors, code compliance officers, police officers, firefighters, finance officials and accountants, and many other positions. In the past, city governments could not offer the wages that were competitive with the private sector, including items such as profit sharing, bonuses and other private sector perks. Instead, the public sector offered employees good benefits at low cost. This tradeoff made sense for much of the 20th century and helped cities maintain